Treasurys quit 5-session win streak as yields rise

SaumyaVaishampayan

NEW YORK (MarketWatch) — Treasurys reversed lower on Tuesday, quitting a five-session win streak, as Federal Reserve Chairman Ben Bernanke concluded his two-day testimony before Congress, fears about Italy’s political situation eased, and stocks extended a strong rally into a second day.

Yields on the benchmark 10-year Treasury note
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rose 2 basis points to 1.90% in afternoon trading. They had been lower ahead of the U.S. stock market’s open and climbed as equities rallied. Yields move inversely to prices and one basis point is one one-hundredth of a percentage point.

The rally in Treasury prices on Monday and Tuesday was mostly a response to the Italian parliamentary elections and the peripheral debt markets, said Kevin Flanagan, chief fixed-income strategist for Morgan Stanley Smith Barney.

In response to the election, yields on the Italian 10-year rose about 50 basis points, Flanagan said. That selloff in the Italian debt market initially boosted Treasurys, considered a safe-haven investment, but some buyers have since reentered the Italian bond market, he said.

“That safe-haven demand that we have been witnessing from time to time based on what happened in European bond markets, that wasn’t with us today,” said Flanagan.

In D.C., Bernanke continued to defend the Fed’s monthly asset purchases in testimony before the House financial services committee on Wednesday and emphasized the role of low interest rates in lifting the economy. He predicted the unemployment rate could fall to 6% in 2016 as part of his semi-annual address to Congress on monetary policy. Read more: Bernanke defends low rates in House hearing.

The Fed in December established an unemployment-rate target for its monetary policy, saying it would maintain low interest rates until unemployment falls below 6.5%. The central bank currently buys $85 billion in Treasury and mortgage debt per month and the Federal Open Markets Committee in December decided to maintain the purchases until the labor-market outlook improves substantially.

“Usually day two of Humphrey Hawkins is not a huge market moving event,” said Flanagan.

Earlier gains in Treasury prices were part of the change in market sentiment as the threat of sequestration becomes more serious and European concerns resurface, driving rates lower, said Jeffrey Young, a U.S. rates strategist at Nomura.

The so-called sequester, postponed from its original Jan. 1 deadline, represents $85 billion in federal spending cuts that will be automatically implemented on Friday if President Barack Obama and legislators can’t reach an agreement.

“I think those things are all contributing to a more bullish market sentiment,” said Young.

Yields on the 30-year bond
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rose 2 basis points to 3.10% and yields on the five-year note
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were 0.780%.

The Italian parliamentary election drew to a messy end on Monday, raising concerns about the demand for Italy’s debt and the Euro-zone’s deficit outlook. But on Wednesday, the 10-year bond auction of 4 billion euros ($5.2 billion) at a yield of 4.83% calmed investors, who had feared yields above 5%. Read more: Italy yields up less than feared amid gridlock

U.S. stocks rose as additional positive data on the housing market was released. In the last hour of trading, the Dow average was up 185 points, on track for its second day of triple-digit gains. Read more: U.S. stock rally builds on home-sales data

Auction

The Treasury Department sold $29 billion in 7-year notes
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on Wednesday at a yield of 1.260%, prompting no response from the market.

Bidders offered to buy 2.65 times the amount of debt sold, just under an average of 2.68 times at the last six auctions.

Indirect bidders, including foreign central banks, purchased 33.4% compared with an average 38.1% in recent sales. Direct bidders, a group that includes U.S. money managers, bought 18.2% compared with an average of 19.2% at the last six sales.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.